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GLOSSARY OF TERMS D – I
Depreciation
The annual loss in book value of improved real estate over its period of ownership as allowed by the IRS.
Disclosure
A person recommending, offering or selling an investment contract to an investor must disclose all material facts affecting the recommended investment. Such information includes the risks of the investment, the compensation paid to any person involved in recommending an investment, any conflict of interest between the firm and its professionals, and any other fact that may affect the objectivity of the recommendation.
Due Diligence
The process of verifying that all material facts and risks, which could possibly affect the outcome of an investment, are disclosed. Due diligence is the responsibility of the Broker Dealer and registered securities Brokers/Representatives prior to offering investments to their clients. In a best practices context, a thorough due diligence should be completed on each investment prior to offering the investment to investors by Broker Dealers.
Exchanger
The property owner(s) seeking to defer capital gains taxes by utilizing a Section 1031 exchange. (The Internal Revenue Code uses the term "Taxpayer.")
Equity Investment
The portion of the total cost of the project which is not covered by financing. An investor usually calculates the potential of a deal based upon his return on investment (equity investment).
Finder's Fees
Referral or finder's fees are generally considered transaction based compensation. Any transaction based commission or compensation paid to an individual or firm involved in recommending, offering or selling TIC investments is compensation that can be paid only to a licensed registered securities Broker/Representative.
IRR (Internal Rate of Return)
1) The yield which equates the Net Present Value of a stream of cash flows to zero. Conversely, it is the annual return one expects based on an initial cash outlay, on a stream of future income. 2) A rate of return which would equate all of the cash inflows (including the sale proceeds) of a property with all the cash outflows (including the purchase price) - i.e. the break even rate of return.
Investor Suitability
Registered securities Brokers/Representatives who recommend an investment to a customer have a suitability obligation with respect to that recommendation. This duty requires a registered securities Broker/Representative to have a clear understanding of the investment goals and the current financial status of the investor, and to ensure that the recommended investment is suitable for that particular customer in light of his or her financial situation and objectives.
